WEEK 1
Question 2 AUG 2014
The size and liquidity of financial markets varies greatly across countries
relative to the size of banking sectors. Discuss some of implications of this for
the design of financial systems and for investment managers who operat

Tutorial Sheet 2: Consumption and Investment (Mankiw Chapter 16 & 17)
Question 1:
Ben is consuming according to the Life-Cycle Hypothesis explained in lectures he wants to
smooth his consumption as much as possible and have no unspent resources at the end

Tutorial Sheet 1: Consumption (Mankiw Chapter 16)
Question 1:
Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $100 in the
first period and $100 in the second period. Jill earns nothing in the first period and $210 in
the sec

Tutorial Sheet 2: Consumption and Investment (Mankiw Chapter 16 & 17)
You will have been allocated to a small group of 3-5 students in your economics tutorial.
You should attempt the questions below in your group and submit your answers to the
Economics E

Tutorial Sheet 1: Consumption (Mankiw Chapter 16)
Question 1:
Jack and Jill both obey the two-period Fisher model of consumption. Jack earns $100 in
the first period and $100 in the second period. Jill earns nothing in the first period and
$210 in the sec

Mar06_Article2 2/24/06 4:11 PM Page 43
Journal of Economic Literature
Vol. XLIV (March 2006), pp. 4395
What Determines Cartel Success?
Margaret C. Levenstein and Valerie Y. Suslow
Following George Stigler (1964), many economists assume that incentive prob

Tutorial Sheet 9: A Model of Dynamic AD and AS (Mankiw Chapter 15)
Question 1
Suppose the monetary-policy rule has the wrong natural rate of interest. That is, the central
bank follows this rule:
it t ' ( t t* ) Y (Yt Yt )
where ' does not equal , the nat

Tutorial Sheet 3: Investment and Government Debt (Mankiw chapters 17 and 19)
Question 1
Use the neoclassical model of investment to explain the short-run impact of each of the
following on the real rental price of capital, the cost of capital, and investm

Ricardian, consumption does not react to debt-financed tax cuts national saving is
unchanged as the fall in public saving is exactly offset by an increase in private
saving, economy doesnt respond in the short or long run.
If traditional is correct, a pe

Phillips curves states that inflation depends on expected inflation E, cyclical
unemployment and supply shocks
Overall equation:
SRAS: output related to unexpected movements in price level
Phillips: unemployment related to unexpected movements in the in

OPECs supply reduction caused an 11% rise in 73, a 68% rise in 74, a 16% in 75:
Predicted effects of the oil shock were an increase in inflation and unemployment,
coupled with a decline in output. The positive shock of the 80s did the opposite.
Stabiliza

> 0 has a negative slope, < 0 DAD has a positive slope. It has varied above
and below zero in the last 50 years. Responsiveness of inflation.
DAD-DAS model assumes that the Taylor principle holds.
Lecture 5, Stabilization Policies
Should policy be activ

PE=C+I+G has a slope of MPC and PE=Y has a slope of 45.
They cross to show the equilibrium value of
income.
An increase in government purchases.
Solving for Y
Government purchases multiplier
. The multiplier is bigger than one
because G Y C Y C Y. The fi

Wellfare Economics
Consider equitable actions (contract curve). Social Welfare functions (SWF). This is a
measure of total wellbeing.
Second Fundamental Theorem of Welfare Economics (SFTWE): Under the same
conditions as FFTWE and if indifference curves ar

Intertemporal utility maximisation:
, p is the subjective
discount rate (degree of impatience)
Utility maximisation gives
if r>p then C increases between the two
periods (visa versa and equal). If p=0, consumption grows at the rate of interest
Fisher arg

where Y >
Unemployment and real GNP have an inverse relationship throughout The Great
Depression.
Depression caused by an inward shift of the IS curve, output and interest rates both
fell
This is supported by the drop and investment and contractionary fi

Lecture 5, Oligopoly
Iso-Profit curves (firm 1 vs firm 2 diagram again where dowards is an increasing
profit for firm 1)
Reaction curve for firm 1 passes through the tops of firm 1s iso-profit curves.
Same idea for firm two however curves and reaction cur

Unknown population characteristic is called a parameter such as Y whereas, our
best guess is a function of the data known as an estimator (symbolised by the hat).
An estimate is a non-random number. Variation from sample to sample is called the
sampling

Bayes theorem for random varaibles
Independent random variables
therefore
.
and
.
Lecture 6, probability distributions
Expected value calculations:
1.
2. Bernoulli:
3. Continuous:
4. Conditional expectation:
Equally easy to from a table as the mean is th

Eventually debt to GDP may stabilize at (1.5): Many different scenarios to learn
however
Fiscal sustainability defined as having a constant or decreasing debt-to-GDP ratio
over the long run.
If growth is significantly large this can achieved while runnin

GDP grows roughly 2-3% each year however there are many short run fluctuations
(for developing countries)
Okuns law: The Negative relationship between GDP and unemployment (holds for
US)
Time horizons in macroeconomics; long run: flexible prices that res

Lecture 3, Monopoly Pricing
Profit maximising vs Capturing surplus, not all surplus received at one price
Uniform pricing vs price discrimination
Pd assumes, no resale (no arbitrage condition) consider role of arbitrage/
speculation
1st degree (perfect),

Fostering economic growth (Solow model). The financial system helps channel funds
to projects with the highest expected returns relative to their risk. Lucrative
investment projects pay higher interest rates to attract funds than firms with less
desirabl

Bayes Theorem:
Where Pr(B2) is the prior probability and Pr(B2A) is the posterior probability
Lecture 4, Random variables and probability distributions
Probability distribution of a discrete r.v. lists all possible values of the variable and
probability

Increase in taxes works in the opposite way to an increase in government purchases,
where C = MPC T , and when solving for Y:
Same idea for the tax multiplier:
The tax multiplier is negative as it reduces C, and greater than one in absolute value
as it h

All graph take on various eventually declining shapes. E(X)=m Var(X)=2m
If and , Student-t is . It is symmetric but has greater mass in the tails when m is
small. However when m>30 (high) it can be approximated as a standard normal
distribution. We rely

Support for the LCH in precautionary saving, bequests and data
Permanent income hypothesis Milton Friedman 1958
ignored temporary (transitory)changes to income.
Low APC low transitory income High APC PIH agrees with
Keynes conjecture that APC falls over

1. Shadow banks, arent regulated as much as they arent Fed insured, yet
policymakers suggest limiting the risk they can take so the cannot hurt the
broader economy.
2. Restricting size too big to fail creates a moral hazard problem.
3. Reduce excessive ri